Identified third parties and rights to enforce contracts
Chudley v Clydesdale Bank (Court of Appeal) [2019]
Up to the year 2000, only the parties to a contract could acquire directly enforceable rights or obligations under it. This was the rule of privity of contract. The situation was changed by the Contracts (Rights of Third Parties) Act 1999 (Third Party Rights Act). One of the requirements of the Act is that for a third party or parties to acquire the right to enforce a contract they must be ‘expressly identified’ either by name or as a member of a class.
Facts:
Some investors had paid money to an investment company (Arck) for the financing of an offshore property development scheme. Unbeknown to the investors, Arck and the bank had signed a letter of instruction (LOI) in relation to the scheme, which instructed the bank to open a segregated client account for the scheme and not to withdraw any funds from it until August 2010, except on receipt of a solicitor's undertaking that the money would be repaid. However, no segregated client account was ever opened and the money paid to Arck was paid into another account it held at the bank. In 2009 the bank made payments out of the account at Arck's direction. In 2012 the individuals behind Arck were arrested for fraud and the company went into liquidation.
The investors later became aware of the existence of the LOI and sought to recoup their losses on the basis that there was a contract between Arck and the bank contained in the LOI of which they were entitled to claim the benefit under the Third Party Rights Act.
Decision:
At first instance (see report from December 2017) the judge decided that if the LOI formed a binding contract the third party investors would have been entitled to claim the benefit of it under the Third Party Rights Act. The Court of Appeal came to the same conclusion.
Whether there was sufficient ‘express identification’ of a class of which the investors were members depended on the construction of the contract as a whole. Express identification either by name, description or as a member of a class is a requirement of s.1 (3). The court said it was clear that the reference to "a client account" was an express identification of the class, namely clients of Arck who were investing in the scheme, and that the appellant investors were within that class.
There was no reason why the same contractual term could not also satisfy the requirement in s.1(1)(b) that the term purported to confer a benefit on the third party. The purpose of the LOI was to protect investors and the provision for the opening of a segregated client account was clearly intended to benefit those investors by ensuring that their monies were so held by the bank. While the requirements of s.1(1)(b) and s.1(3) were cumulative, it did not follow that the same term could not satisfy them both. In addition, the investors could take the benefit of the contract, even though they were unaware of its existence at the time of their investment and when they first sought to recover that investment. It was not a requirement of the Act that a third party who was entitled to the benefit of a contract was aware of the contract at the time it was made, or at any particular time thereafter.
The burden of proof will usually, in practice, be on the promisor, so that doubts as to the parties' intentions will be resolved in the third party's favour. A promisor who wishes to put the position beyond doubt can exclude any liability to the third party that he might otherwise have had."
There was nothing in the LOI which indicated that the investors should not be allowed to enforce the relevant term. The investors were the only persons who had an interest in enforcing the term and it would therefore be surprising if the contract were construed to mean that they could not.
Points to Note:
- This case illustrates that the requirement to be ‘expressly identified’ does not require that each individual member of the class be expressly identified. Nor does there need to be any express identification of the class in question with reference to the CRTPA itself. Provided the class in question can be sufficiently identified it can be implicit that they were intended to have rights.
- If there is concern that a third party or members of a group might be an identified beneficiary and therefore able to enforce a contractual provision when that is not the intention, it is relatively easy to expressly state that there is no intention to grant rights under the CRTPA to any third party and this should arguably be done routinely in the contract ‘boiler plate’.